Europe: Research Cost Re-Bundling – Is the UK Going Back to the Future?

By: Andrew Massey, Philip Morgan, and Omega Modi

The UK’s FCA has published consultation paper 24/7: Payment optionality for investment research. It proposes a new, more flexible, way to charge third-party investment research to clients.

The new payment option would sit alongside the two existing options under which research costs are either paid by firms from their own resources or charged to clients through a research payment account. The latter approach has not been popular because of its operational complexities, so research has been an out-of-pocket expense for many UK asset managers.

The FCA proposes to allow firms to pay jointly for research and trade execution – so-called ‘bundled’ payments – and for bundled payments to be charged to clients. This would be subject to significant ‘guardrails’ to mitigate against potential negative impacts, including research overconsumption and price increases.

The proposed ‘guardrails’ include (i) compliance with best execution, (ii) separate identification of payments for research, (iii) a mandatory formal policy covering matters such as decision making on third-party research procurement, (iv) a structure for allocating payments between different research providers, (v) a firm budget for research spend, (vi) fair allocation of that spend between clients, (vii) regular monitoring of research spend and usage, and (iv) detailed disclosure to clients. Arguably, these conditions make the new option more of a hybrid approach – not full re-bundling – and it remains to be seen whether it will, as intended, be operationally more straightforward than research payment accounts.

The consultation takes forward a key recommendation of the Investment Research Review (IRR), which observed that unbundling had adversely impacted the provision of investment research. The IRR was commissioned as part of the UK Government’s current initiative to drive growth and international competitiveness in UK financial services, known as the “Edinburgh Reforms”. The consultation closes on 5 June 2024 with final rules due before 30 June 2024.